Catalog

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p. 11 of 32 BACK | NEXT I. Introduction II. Assessment of Past Performance III. Rationale and Role A. The Private Sector and Poverty Reduction B. Rationale for and Role of Private Sector Operations IV. Operational Strategy V. Operational Improvements VI. Resource Requirements VII. Conclusions and Recommendations

Private Sector Operations: Strategic Directions and Review : III. Rationale and Role

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B. Rationale for and Role of Private Sector Operations

43. PSO activities do not stand alone in ADB, but are an important component of ADB’s operations. Both the PSD Strategy and the LTSF mandate ADB to support private sector development through both public and private sector operations in ways that are tailor-made to country needs and conditions. Through its public sector operations, ADB helps DMC governments to create an environment conducive to private sector investment. For many reasons, including country risk perceptions or the quality of the enabling policy and regulatory environment, the setting is not always adequate for private investment to materialize. Often, the investment has to be catalyzed and the perceived sovereign risk mitigated by the participation of a multilateral development bank (MDB) to give comfort or enhance credit. Through PSO, ADB is able to play such a catalytic and risk mitigating role, designed to facilitate private capital flows. ADB participation sends a signal of market confidence, which can “crowd in” private investment.

44. ADB’s “dual capability” of having public and private sector operations under one roof offers important synergies. Direct involvement in PSO gives ADB hands-on experience regarding impediments to PSD that can inform its public sector policy dialogue and the design of its public sector operations. This hands-on experience strengthens ADB’s credibility as a public policy adviser to governments on the enabling environment for private investment. At the same time, by financing pioneering private projects in a particular sector, ADB through PSO can test the soundness of the regulatory environment for private investment or demonstrate the feasibility of innovative financing structures by actually taking risk along with private investors and lenders. Thus, PSO can have a significant “bottom-up” influence on improving regulatory frameworks to help governments open the sector to private investment, domestic and foreign.

45. PSO and public sector activities are mutually reinforcing. The combination of PSO and public sector activities enables ADB to deliver a “comprehensive development solution” to a DMC within the context of the relevant country strategy. For instance, ADB’s risk mitigating role in PSO has a market facilitating effect that can instigate developmental private sector projects even before conditions for private investment are fully appropriate. This enables ADB to lead the private sector in delivering development impacts in a timely manner to satisfy the need for critical infrastructure services (e.g., power, water, and transport), freeing up government budgets to concentrate on investments that are truly “public” in nature. In the long run, the appropriate mix of public and private sector operations should be decided on a country-by-country basis, based on whether development impact can best be achieved through public sector interventions or private sector projects.

46. The LTSF institutionalizes ADB’s commitment to PSO in the following terms:

Although private sector operations are a very small part of ADB’s total portfolio at present, involvement with the private sector is expected to increase substantially in the years to come, as a consequence of the increasingly important role of the private sector in the development process. For ADB’s private sector operations to have a meaningful and relevant impact, it must undertake a critical mass of private investment.³⁶

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